Federal Reserve Credit declined $17.4bn last week to $2.154 TN. Fed Credit
has declined $92bn y-t-d, although it expanded $281bn over the past 52 weeks
(15.0%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past
week (ended 10/29) jumped $11.4bn to a record $2.899 TN. "Custody holdings" have
expanded at an 18.4% rate y-t-d, and were up $412bn over the past year, or
16.6%.

Total Commercial Paper outstanding rose $10.6bn (11-wk gain of $302bn) to
$1.377 TN. CP has declined $304bn y-t-d (22% annualized) and $173bn over the
past year (11%). Asset-backed CP declined $5.6bn to $543bn, with a 52-wk drop
of $178bn (25%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $521bn y-o-y to a record $7.407 TN. Reserves have increased
$643bn year-to-date.

Global Credit Market Watch:

October 30 - Bloomberg (Lester Pimentel and Catarina Saraiva): "Mexico's
dollar bonds are posting their biggest monthly declines since January on speculation
President Felipe Calderon will fail to cut the budget gap enough to avoid a
credit-rating downgrade. The debt lost 2% this month..."

October 30 - Dow Jones (Ainsley Thomson): "October saw record-high issuance
of euro-denominated high-yield bonds, beating the pre-crisis high reached in
2007, as investors' appetite for riskier, higher-yielding assets continues
to strengthen. High-yield bonds worth EUR6.7 billion were sold in October,
beating the previous record of EUR6.6 billion set at the height of the bull
market in June 2007..."

October 30 - Bloomberg (Emre Peker): "Bank of America Corp. and Goldman Sachs
Group Inc. led lenders in arranging a record $2.26 billion of leveraged buyout
financing in October, more than eight times the amount raised in the first
quarter, as the U.S. exits the worst recession since the Great Depression."

October 28 - Bloomberg (Peter Eichenbaum and David Mildenberg): "GMAC Inc.,
the lender that received two government bailouts totaling $13.5 billion, is
in talks with the Treasury Department to receive a third lifeline... The U.S.
government may inject an additional $2.8 billion to $5.6 billion into GMAC..."

October 27 - Bloomberg (John Gittelsohn): "Capmark Financial Group Inc.,
the lender that filed for bankruptcy this week, was making billions of dollars
in property loans just as investor Sam Zell was exiting the U.S. office market
in early 2007. In 2006 and 2007, Capmark originated $60 billion in commercial
mortgage loans, most for office buildings, according to the Oct. 25 bankruptcy
filing. While Capmark was lending, Zell was selling Equity Office Properties
Trust at the top of the market for $39 billion, including debt."

Currency Watch:

The dollar index rallied 1.3% to 76.42. For the week on the upside, the Japanese
yen increased 2.2% and the British pound 0.9%. On the downside, the New Zealand
dollar declined 4.8%, the South African rand 4.5%, the Swedish krona 4.4%,
the Norwegian krone 2.9%, the Canadian dollar 2.9%, the Brazilian real 2.5%,
the Australian dollar 2.5%, and the Euro 1.9%. For the week against the Japanese
yen, the New Zealand dollar declined 6.7%, the South African rand 6.6%, the
Swedish krona 6.4%, the Norwegian krone 5.0%, the Canadian dollar 5.0%, the
Brazilian real 4.6%, and the Australian dollar 4.6%.

Commodities Watch:

October 29 - Bloomberg (Nicholas Larkin): "The time to hold gold is now as
faster inflation and increased purchases through exchange-traded funds and
by central banks boost demand amid stagnant mine output, Paul Tudor Jones's
Tudor Investment Corp. said. 'I have never been a gold bug,' Jones... told
investors... 'It is just an asset that, like everything else in life, has its
time and place. And now is that time.'"

October 28 - Bloomberg: "China Investment Corp., the country's sovereign
wealth fund, said it has $110 billion for overseas investments and will focus
on buying into commodities companies and property as a hedge against accelerating
inflation. 'Now we are seeing expectations of medium and long-term inflation,
and the value of major currencies may have to fall to a new equilibrium level,'
Chairman Lou Jiwei told a forum... 'Investing in major commodities can be a
hedge. So is investing in real estate.'"

October 28 - Bloomberg (Luzi Ann Javier): "Rice prices may return to record
levels as bad weather curbs output in major growers and forces some nations
to accelerate imports, a Philippine minister and the U.S. Rice Producers Association
said. 'We are not very far from another rerun of 2008 prices,' Arthur Yap,
the Philippines' Agriculture Secretary, said... Higher oil prices may push
up fertilizer costs, boosting prices further, he said."

October 27 - Bloomberg (Sophie Leung and Bernard Lo): "Stephen Roach, chairman
of Morgan Stanley Asia, said investors are wrong to bet that China will restrain
its unprecedented stimulus after the economy accelerated in the third quarter.
'The Chinese really are fixated on one thing and one thing alone which is social
stability -- they don't want to take a risk of another negative growth surprise'
slowdown, Roach said..."

October 27 - Bloomberg (Sophie Leung): "China predicted an acceleration in
industrial production and reported a 190% jump in overseas investment for the
third quarter... Investment by Chinese firms abroad rose to $20.5 billion in
July through September, almost triple a year earlier... Industrial output may
rise 16% in the fourth quarter, Ministry of Industry and Information Technology
official Zhu Hongren said..."

Japan Watch:

October 30 - Bloomberg (Toru Fujioka): "Japan's jobless rate unexpectedly
dropped to a four-month low in September, adding to signs that a recovery in
the world's second-largest economy is spreading to consumers. The unemployment
rate fell to 5.3% from 5.5% in August..."

India Watch:

October 29 - Bloomberg (Luzi Ann Javier): "India, the world's second-largest
rice grower, may become a net importer for the first time in 21 years in 2010,
potentially sparking the kind of 'panic' that sent prices to records in 2008,
an agricultural economist said. India may import as much as 3 million metric
tons next year after the wet season harvest plunged, Samarendu Mohanty, a senior
economist at the International Rice Research Institute, said..."

Asia Bubble Watch:

October 29 - Bloomberg (Jacob Greber): "Asian economies are 'rebounding fast'
from the global crisis, helped by fiscal support that the region's governments
must maintain due to sluggish world export demand, the International Monetary
Fund said. Growth in Asia including Japan, Australia and New Zealand will probably
accelerate to 5.8% next year from 2.8% this year, 'well below' the 6.8% average
over the past decade... Asian governments have pumped more than $950 billion
into their economies by cutting taxes, distributing cash and boosting spending..."

October 28 - Bloomberg (Stephanie Phang): "Malaysia's central bank refrained
from raising interest rates, opting to keep borrowing costs at a record low
to support a nascent economic recovery... Bank Negara Malaysia kept its overnight
policy rate unchanged at 2%... 'The international economic and financial conditions
have improved further,' the central bank said. 'Notwithstanding these improvements,
the outlook for the global economy continues to be uncertain, with recovery
likely to be slow and uneven in view of the ongoing adjustments.'"

Unbalanced Global Economy Watch:

October 28 - Bloomberg (Alexandre Deslongchamps): "Canadian home prices posted
their fourth consecutive monthly increase in August... the Teranet-National
Bank National Composite House Price Index showed. Prices were up 2% during
the month... On an annual basis, prices were down 3.4%."

October 30 - Bloomberg (Jurjen van de Pol): "European factories increased
capacity usage on assembly lines for the first time in two years this quarter...
Assembly-line activity in the euro area rose to 70.7% of capacity this quarter
from 69.6% in the prior three months..."

October 28 - Bloomberg (Fergal O'Brien and Simone Meier): "Hugh McGee is
cutting the price of Guinness by about 20% at his bars and hotels in the Irish
town of Letterkenny to keep customers coming across the border from Northern
Ireland after the euro's surge against the pound. McGee reduced the price for
a beer this month to 3.50 euros ($5.18) at his hostelries after the pound's
12% drop against the euro in the past year led customers from the U.K. province
of Northern Ireland to stay home."

U.S. Bubble Economy Watch:

October 29 - Bloomberg (Dunstan McNichol): "Retirement accounts for states
and local government employees lost $600 billion in value in the year that
ended June 30, a decline of 21%, a U.S. Census Bureau report shows. Assets
of the 100 largest public retirement systems, accounting for 89% of public
pension activity, fell to $2.2 trillion, the lowest in five years..."

Real Estate Watch:

October 29 - Bloomberg (Kathleen M. Howley): "About 18.8 million homes stood
empty in the U.S. during the third quarter... The number of vacant properties,
including foreclosures, residences for sale and vacation homes, rose from 18.4
million a year earlier and 18.7 million in the second quarter... The record
high was in the first quarter, when 18.95 million homes were vacant."

Central Banker Watch:

October 28 - Bloomberg (Josiane Kremer): "Norges Bank raised its key interest
rate a quarter point from a record low and signaled steeper increases than
it previously forecast over the next three years as inflation accelerates and
unemployment remains low. The... bank raised the overnight deposit rate to
1.5%, becoming the first European central bank to reverse its easing cycle
since the credit crisis started to abate."

October 29 - Bloomberg (Liz Capo McCormick): "The Federal Reserve will complete
its $300 billion Treasury purchase program today... Yields on the benchmark
10-year note, which help determine rates on everything from mortgages to corporate
bonds, never rose above 4% after the central bank began acquiring the debt.
They are less than half a percentage point higher than the day before the program
was announced on March 18, even though the U.S. sold a record $1.25 trillion
in notes and bonds, more than double the amount in the year-earlier period."

October 29 - Bloomberg (Jana Randow and Rainer Buergin): "European Central
Bank council member Axel Weber signaled the bank may start to withdraw its
emergency stimulus measures next year by scaling back its 'very long- term'
loans to banks. 'Some of the new instruments will be needed longer than others,'
Weber, who heads Germany's Bundesbank, said... 'From today's perspective, the
unlimited allotment in our main refinancing operations will have to be maintained
for a longer period of time than the guarantee of very long-term liquidity.'"

October 30 - Bloomberg (Mayumi Otsuma): "The Bank of Japan said it will stop
buying corporate debt at the end of the year, as central banks around the world
phase out emergency measures taken at the height of the financial crisis. Governor
Masaaki Shirakawa and his colleagues also said they will only extend a program
providing unlimited collateral-backed loans to banks one last time through
March 31."

October 30 - Bloomberg (Frances Robinson and Mark Barton): "Former Bank of
England policy maker Charles Goodhart said the bank may scale back or pause
its bond- purchase program next week as officials around the world start to
pull back stimulus for their economies. 'The expansion of quantitative easing
will be reduced in scale and possibly paused for a time,' Goodhart said...
The Bank of England will follow 'slightly more cautiously,' he said."

October 27 - Bloomberg (Cherian Thomas): "India's central bank took the first
step toward withdrawing its record monetary stimulus as inflation pressures
build, ordering lenders to keep more cash in government bonds. 'It may be appropriate
to sequence the 'exit' in a calibrated way,' Governor Duvvuri Subbarao said...after
increasing the statutory liquidity ratio to 25% from 24% and raising the inflation
forecast. The central bank kept benchmark policy rates unchanged, while maintaining
its economic growth forecast of 6% 'with an upward bias.'"

Muni Watch:

October 30 - Bloomberg (Jeremy R. Cooke): "State and local governments led
by California sold more than $12 billion of fixed-rate bonds this week, the
most in six months, pushing 20-year benchmark tax-exempt yields to their highest
level since late August."

California Watch:

October 28 - Bloomberg (Darrell Preston): "California is the world's eighth-largest
economy. Diamond Offshore Drilling Inc. is the largest U.S.-based deepwater
oil driller. The state known for its wine, Hollywood and earthquakes collected
about $80 billion in taxes in the year ended June 30, compared with $3.6 billion
in revenue for Houston-based Diamond. The two have similar credit ratings,
and the state can rely on its taxing authority to address deficits. Still,
the company got a better deal than California when each borrowed money this
month."

New York Watch:

October 29 - Bloomberg (Michael Quint): "New York's budget deficit increased
to $3.2 billion for the 12 months ending March 31, and state fiscal officials
forecast Wall Street bonuses will fall 22%... Governor David Paterson said.
The $3.2 billion gap is up from the $2.1 billion estimated by the Division
of Budget on July 30..."

Speculation Watch:

October 26 - Bloomberg (Tom Cahill): "Hedgebay Trading Corp., operator of
the oldest site for swapping stakes in hedge funds, said September transactions
show the fourth monthly drop in prices for funds in the $1.4 trillion industry.
Transactions in September took place at an average discount to net asset value
of about 17%, down from 12% in August...While prices have recovered from a
record discount of 20% in March, investors are leery of overpaying for hedge
fund investments, Hedgebay said."

October 28 - Bloomberg (David Scheer, Josh Fineman and Karin Matussek): "K1
Group, the German hedge fund firm, is embroiled in an international criminal
investigation after saddling banks, including Barclays Plc, JPMorgan... and
BNP Paribas SA, with about $400 million of losses..."

The Newest Abnormal

The eighties brought us Japan's "miracle economy". The '88 Dukakis presidential
campaign delivered the "Massachusetts miracle" - not many years later renamed "Massachusetts
miserable." The Asian Tiger "miracle economies" (and markets!) were all the
rage in the mid-90s - until their systems blew apart. Here at home, there was
all the "New Paradigm" and the "New Era" hoopla. And until the recent crisis
and double-digit GDP downdraft, many bravely trumpeted Ireland's Celtic Tiger
miracle.

It's as if there's a contest to coin a catchy phrase that will gain popular
acceptance. There was "muddle through" to describe the expected course of the
post-tech Bubble economy. The "Great Moderation" lauded newfound policymaker
success in moderating economic (and inflation) variability. And who can forget
the vaunted "stable and desirable" global monetary "system" - "Bretton Woods
II" - analysis that rationalized Credit Bubble excesses. Then there was the
pride and joy of coining "the shadow banking system." Now it's "The New Normal."

I must be a grump, as I'm rarely fond of popular economic catchphrases. The "miracles" were
- without exception - belatedly recognized as Bubbles. Bullish visions of new
eras and paradigms were similarly Bubble delusions. I never bought into the
post-technology bust notion of a "muddle through" economy. It was just inconsistent
with Bubble analysis - and the dynamic of a more powerful Bubble throughout
mortgage finance emerging from the tech wreck. Bubbles tend to not muddle.

I scoffed at "The Great Moderation." The framework from which it originated
was flawed. An optimistic view held that astute central banking had become
quite adept at tinkering with interest rates. Students of economic history
found this disconcertingly reminiscent of the fateful view from the "roaring
twenties" that central banking had conquered the business cycle. Central banking
has repeatedly been given way too much Credit, while the expansive influence
of speculative finance is always easily ignored.

There was no disputing the impressive potency central bank rate cuts had
attained (over the past 20 years) for reigniting and sustaining economic growth.
Yet rigorous analysis of the Credit system would have illuminated the newfound
role of the Wall Street firms, Fannie Mae, Freddie Mac, the FHLB, the massive
securitization marketplace, derivatives, and the hedge funds. Central bankers
hadn't become smarter or even more sophisticated. But never had they enjoyed
such a powerful monetary policy tool - an expanse of aggressive players keen
to stimulate Credit expansion, the markets and the economy at a moment's (or
25bps) notice. Over a period of many years the Credit system - and the Fed's
transmission mechanism to the real economy - had been completely transformed.
It should have appeared shadowy only to those that had clung to a narrow focus
on banking system Credit.

"Bretton Woods II" propaganda really rubbed me the wrong way. "How can intelligent
analysts not see that the U.S. has exported its Credit Bubble to the rest of
the world," I would mumble to myself at the time. There was certainly nothing
stable or desirable about the arrangement of the U.S. massively inflating Credit
- using these IOUs to feed asset Bubbles and over-consumption. Especially with
foreign central banks content to monetize these dollar flows, in the process
dangerously inflating their asset markets and economies. Again, the key to
sound analysis was rigorous analysis of underlying Credit structures and financial
flows.

Which brings me to the latest and greatest: "The New Normal." It's not
that I have huge issues with the analysis - it's certainly not "miracle," "New
Era," or "Bretton Woods II" silliness. I just sense it's incomplete and misses
some important aspects of the unfolding backdrop. From Bill Gross: "We're
transitioning due to popped bubbles and de-risking of portfolios and balance
sheets... A simple way to look at it is that private market capitalism simply
went too far over the last 10-20 years, and now we're in the process of pulling
back and accommodating deleverging, regulating and de-globalization."

From my perspective, the "New Normal" appears more like the old than something
new: I prefer "The Newest Abnormal". To be sure, there have been some popped
Bubbles. But we remain trapped in the same old Bubble inciting paradigm of
activist central banking and government policymaking. I have expounded the
view that a "government finance Bubble" emerged with the bursting of the Wall
Street/mortgage finance Bubble. I would argue that Bubble dynamics have taken
firm hold in China, throughout Asia, and in the "developing" economies more
generally. New Normal reminds me too much of "muddle through."

"Deleveraging" is at this point overrated. Our federal government issued about
$1.9 TN of additional debt over the past year. In my book, that's "leveraging." The
Fed's balance sheet has become much more leveraged. The mortgage businesses
of Fannie, Freddie, Ginnie and the FHA have become much more "leveraged." The
Newest Abnormal is about massive synchronized global government Credit expansion
and extreme monetary looseness. The Newest Abnormal sees massive "private" Credit
expansions in China, India, Brazil, and the "developing" markets. The Newest
Abnormal is fueling historic Credit and economic Bubbles in China.

The Newest Abnormal has seen a major resurgence in the global leveraged speculating
community. The Newest Abnormal is acting with great speed to impair the dollar
as the world's reserve currency - taking unfettered financial "globalization" to
a whole new level. The Newest Abnormal has animal spirits that could give the
old ones a run for their "money".

Mr. Gross's New Normal - constrained by "deleveraging and reregulation" -
seems to imply a more subdued and therefore stable Credit landscape. Such a
backdrop would be consistent with lower average economic growth and lower investment
returns. The Newest Abnormal - with varieties of newfangled Bubbles, excesses
and uncertainties - would point to ongoing financial and economic volatility.
The "averages" may indeed be lower going forward - but it may be the divergences
that prove most noteworthy (hard asset returns vs. securities; non-dollar vs.
dollar; China GDP vs. U.S., for example).

The New Normal implies more monetary order, while the Newest Abnormal suggests
unrelenting Monetary Disorder. The proponents of the New Normal would tend
to view extreme government intervention as a stabilizing force appropriate
for a (deflationary) post-Bubble landscape. From the Newest Abnormal perspective,
massive government deficits and market interventions inaugurate a dangerous
new stage of global inflationism. Newest Abnormal analysis posits that a more
stable New Normal backdrop would, at this point, likely only arise after a
major government debt crisis.

It was a Newest Abnormal kind of week. For months now, unprecedented global
government intervention has spurred a stampede back into risk assets. Buoyant
risk markets then sparked a run of bullish optimism. Not surprisingly, everyone
ended up on the same crowded side of the reflation trade. This week, global
equities, emerging market bonds, commodities, and most currencies were rocked
by heavy selling pressure. Those borrowing in yen to leverage higher-yielding
currencies in, for example, New Zealand or Sweden, had their heads handed to
them. The reflation bet definitely had some air kicked out of it. And many
believing, with two months to go, that they had great years in the bag are
now recalling that sick 2008 feeling. It's a reasonable bet that heightened
uncertainty and market volatility have returned and will be sticking around
a while.